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Monday, 17 June 2013

NBN: How the Coalition Plan will Smash it.

A lot of commentators have said on the NBN Coalition Plan, it is one or both:

"good enough", or

they've embraced the necessity of the NBN and given up their long-time ambition of "Smash the NBN".

I believe both positions are naive and wrong, nothing has changed so why will their position have changed?

The Coalition has always been implacably opposed to the NBN on a raft of ideological grounds which haven't changed: they are anti-public ownership, anti-public businesses (on the false grounds that only private enterprise can be truly 'efficient') and violently pro-private ownership. The Howard-Costello sale of any and all Government assets and the early push to outsource all services shows this is Core Policy, not an abberation.

This isn't a variation of "Socialise Losses, Privatise Profits", but at the heart of their financial-first political catechism.The figures in the Coalition NBN Plan have all been carefully fabricated to seem "reasonable" while constructing an outcome that will fulfil their ideological goal: destroy the publicly-owned NBN.

The give-away in the Coalition figures is the deliberate withholding of critical detail, like the number of nodes, the average VDSL2 cost per premise, the FTTN's economic lifetime and any breakdown of expenses and revenues. Then there's the omission of projections past 2021, but

If you think it's unfounded suggesting that the Coalition could or would place ideology above public good, waste money or avoid necessary investment, think again.

In contrast, Tony Abbott was a senior minister in the Howard government which slashed road funding by $2 billion, starved rail of much-needed investment and refused to commit even one dollar to urban public transport. In fact under the former Howard Government, infrastructure spending hit a record low.

If all you save is $450 on each of 9M services, a total of $4 billion dollars, then how do you save a total of $17 billion and decrease operating expenses by 20-25%?? It's impossible.

If Fibre-to-the-Node (FTTN) either ADSL or VDSL/VDSL2 were ever economic in Australia, then why haven't we seen them rolled out and been successful?

Telstra runs the largest network of 8500+ Nodes, RIMs, and has never attempted to complete it's early 1990's plan to replace the entire copper network by 2010.

TransACT attempted to rollout a FTTN network in 2002/3 for $40 million. It sold at around a 75% discount.

The only VDSL2 service in Australia is offered in a high-density CBD complex of 1400 dwellings in Adelaide.

Since 2000, the economies of nodes versus direct Fibre has steadily shifted to direct Fibre.

The scenario I think will most likely play out is straightforward.

The 75% of fixed-line connections being VDSL2/FTTN is designed to drive down revenues to unsustainable levels.

Why not 33%, 50% or 90%?

Just enough Fibre to placate the electorate, but not enough for critical mass.

This couples with the mandate for NBN Co to provide for direct Fibre in FTTN areas: maximum cost, minimum revenue.

The revenue from the FTTN is doubly reduced compared to direct Fibre:

The NBN Fibre price schedule allows them to charge many different rates for the same connection: NBN Co do nothing but flip a bit to increase the value (link speed) of a service. This maximises revenue by reducing Consumer surplus.

Compare this to the presumed single-price for VDSL2/FTTN services.

Secondly, the NBN Co is based on continued, very solid growth in download volumes. While they halve cost per GB every 3 years or less, their 30% compound annual growth rate is conservative.

The NBN Co plan revenue growth was always driven by high-end users: those connected with big pipes. With the majority of people capped below 40Mbps, all this revenue is lost.

The FTTN netwok has at best a 6 year advantage over direct Fibre.

After ~5 years, all the initial economic advantages of VDSL2/FTTN will be overtaken by the lower operational costs of direct Fibre. The FTTN will be more expensive to run, causing an increase in service access charges, and a nightmare in charging for Retail Service Providers.

The Coalition has made statements that it prefers explicit subsidies to uniform pricing as a cross-subsidy, but what of the VDSL2/FTTN and direct Fibre networks?

As the FTTN becomes increasingly expensive to run, will NBN Co be allowed to charge differently for it and direct Fibre?

I expect they'll force a cross-subsidy to artificially support the old, degraded copper network.

The Coalition will cap NBN Co funding unrealistically low: at ~$30 billion, when they know they'll still need $40-$45 billion as VDSL2/FTTN can only save $4 billion, not the claimed $17 billion.

Will a Coalition Government allow NBN Co to raise additional funds through Debt, by issuing Bonds, or starve them of money, forcing the company into liquidation?

In liquidation, NBN Co assets will only be worth a small fraction of their value as a "going concern".

The major creditors, Telstra and Optus, will have the option to swap their debt for ownership...

The take-up rate in VDSL2/FTTN areas will be much lower than for direct Fibre, not so much because of the removal of "cherry-picking" clauses, but from the direct competition by G4/LTE wireless networks.

Telstra and Optus have everything to gain by owning the wholesale and retail services to customers versus only the retail side in a highly-competitive market, and

Same price, faster service: why would rational consumers sign-up for VDSL2/FTTN and not with a G4 mobile operator?

Once privatised, especially if it's gone bankrupt, Telcos will be able to charge very much more for NBN Co services, the ACCC not withstanding.

They simply don't have to build-out a universal direct Fibre network, but can charge "cost recovery" for individual Fibre connections. $5,000 will turn out to be a lowball estimate.

Would the Coalition intentionally destroy a $30 billion Government investment?

Under Howard they wasted far, far more than that, so I believe, "in a heartbeat".

Under Abbott, a Coalition Government will focus on proving it's mantras: "Worst Government Ever" and "Great Big White Elephant" about the NBN.

Why would they want, or allow, NBN Co to succeed when it undermines the last 4 years of their rhetoric? This also nicely explains the indecent haste with which they wish to remove an independent, competent CEO, Mike Quigley. As I've previously opined, Australian Governments have a history of removing "non-compliant" CEO's, especially of their Telcos.